Friday, July 18, 2008

The US Economy In Perspective

Source : The Business Times, July 18, 2008

THE past week has been pretty rough for those in charge of the US economy. For the second time this year, US Treasury and Federal Reserve officials had to work overtime last weekend to prevent another financial meltdown.

Between them, the two troubled entities in question - Fannie Mae and Freddie Mac - control just under half of US mortgages, worth a monumental US$5.2 trillion, or more than a third of US GDP. A serious situation, no doubt, but it's also important to take a step back and look at things in perspective.

In nervous trading last Friday, Fannie and Freddie saw their share prices halve in the course of a few hours. Elsewhere in the financial sector, trading this week has seen troubled banking giant Citigroup's share price tumble to 10-year lows, and insurance giant AIG's fell to levels not seen since 1995.

But despite all the bad news from the US financial sector, and a growing fear that we could well see more US bank failures, Wall Street's key indices still ended Wednesday trading as much as 3 per cent stronger, thanks to good news elsewhere - such as a great Q2 number from chip giant Intel.

True, Wall Street's key stock indices have fallen 14 to 15 per cent year to date. On the other hand, we've witnessed losses of more than 20 per cent each in Germany, the Antipodes, Malaysia, Thailand and Hong Kong. The decline in Singapore's STI and Japan's Nikkei was somewhere in between.

And yes, on top of having to finance expensive military operations abroad, and a hefty US$100 billion fiscal stimulus package more recently, the US government now faces the prospect of having to inject taxpayer funds into both Fannie and Freddie. UK-based research firm IDEAglobal estimated yesterday that based on the US Savings and Loans crisis in the early '90s, the final bill for US financial sector bailouts could possibly hit something like US$400 billion, or roughly 3 per cent of US GDP.

But here's a bit more perspective. The US budget deficit currently stands at a manageable 2.4 per cent of GDP. Japan - which doesn't have to finance any expensive wars abroad - has a larger deficit of 2.7 per cent of GDP.

What about US public debt? Yes, we are talking about a huge number of about US$14.5 trillion. But try to think about it this way: Would you be worried if your friendly next-door neighbour had bank borrowings equivalent to one year's income? Well, that US public debt number is only slightly larger than the US economy's annual GDP.

It remains true that, all things considered, the US economy is likely to get much worse before its get better, especially if the US dollar continues to slide from its near-record lows, and oil prices continue to rise. But even the doomsday scenario should be viewed in perspective - and the fact is that for all its troubles, the US economy still has strong foundations.

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